INSIGHT: Growing in fits and starts

31 March 2010 22:07  [Source: ICIS news]

By Nigel Davis

China consumers crticalHOUSTON (ICIS news)--Growing away from the slump, producers are filling underutilised capacities but are not yet wholly clear of just what they might need in future.

That uncertainty clouds the petrochemicals outlook.

Companies are “cautiously optimistic”, although that has become a tired phrase. The world is just about back to where it was - in terms of economic output - before the slump. Consultants are projecting stronger basic chemicals and plastics growth out to 2015 compared with the 2000 to 2005 period.

So was the peak of the cycle - or the chemicals earnings “plateau” that some like to call it - an aberration? More likely than not, it was. Markets remained tight as demand continued to rise. Prices were pushed higher by the inflated oil price.

But the consumer has given up on chemicals, or at least on so many of the products that are purchased when times are good but not when cash is tight.

Fiscal stimulus has underpinned growth for a worryingly long time. It has done its job, certainly, but as it is relaxed the strength of consumer - and hence chemicals - demand is exposed.

That is as true of China as it is of the US and Europe. An apposite quote from CMAI’s Gary Adam’s, speaking at this year NPRA International Petrochemical Conference was: “When you take the consumer out of the game; the game stops”.

Filling inventories give some a sense of optimism but the question increasingly is: who is going to supply those volumes - and, when it returns, real, consumer-led, demand growth?

Gross domestic product (GDP) growth in the US and western Europe has remained fragile so far this year. Petrochemical producers have relied heavily on exports to Asia to buoy demand.

As consultants Chem Systems point out in a just released report, lengthening markets in Asia after the Lunar New Year holiday impeded the rate of recovery in western markets. New sources of supply in China pushed (China) inventories higher.

We are in the midst of a great capacity wave. “At least five new crackers, with a combined capacity totalling more than four million tonnes/year of ethylene achieved commercial production in the first quarter,” the consultants say.  “Most crackers were integrated with further new derivative capacity on site,” they add.

And those plants came on as China’s domestic demand slumped. China took in 22% less linear low density polyethylene (LLDPE) in February: 177,697 tonnes compared to the same period last year and down 21% from January levels, according to the latest China Customs data.

Polyvinyl chloride (PVC) imports plunged 55% year on year to 99,230 tonnes and were down 19% from January.

The slowdown had been expected. We’ll have to wait for March data to get a better feel for what demand growth is heading this year.

That adds significantly to the uncertainty.

CMAI reckons that 26% of global basic chemicals and plastics capacity currently is not operating. New plants are coming on-stream but by no means all are running hard. That is good news for most - although not for the plant operators - given generally fragile demand. But it is supporting a false picture. Olefins and polyolefins markets in western Europe and North America have tightened as product inventories have built. But we have an unsupported effective higher capacity utilisation rate.

The industry is widely expected to grow out of this situation but, more likely than not, in fits and starts. Managing production operations and supply chains effectively will remain difficult through much of 2010.

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By: Nigel Davis
+44 20 8652 3214

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